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Some critics to the contagion correlation test

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  • Sarai Criado Nuevo

Abstract

The term contagion is generally used to refer to the spread3 of market shocks from one country to another. However, identifying what is meant by contagion and its consequences has become in recent years a literature in itself4, given the importance of such consequences on economies all over the world. Despite the lack of theoretical consensus, some authors try to measure contagion through the use of correlation tests. The aim of my work is to raise a technical and conceptual critique concerning these models. To support my concerns I provide a broad vision and background of contagion literature and an insight in the particular field of contagion correlation test. The work is organized in four parts. Firstly, an overview of definitional issues concerning contagion, as presented in the literature, is explained together with the different crisis transmission channels that authors have identified. Secondly, a detailed description of the contagion correlation test –as the most common means to search for contagion—is presented, giving a full overview of the models used in the literature. Thirdly, I will express my concerns about the test and the models of the previous section. Finally, some conclusions are stated.

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Paper provided by FEDEA in its series Working Papers on International Economics and Finance with number 05-01.

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Handle: RePEc:fda:fdadef:05-01

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  1. Graciela L. Kaminsky & Sergio L. Schmukler, 1999. "What triggers market jitters: a chronicle of the Asian crisis," International Finance Discussion Papers 634, Board of Governors of the Federal Reserve System (U.S.).
  2. Karolyi, G Andrew, 2003. "Does International Financial Contagion Really Exist?," International Finance, Wiley Blackwell, vol. 6(2), pages 179-99, Summer.
  3. Giancarlo Corsetti & Marcello Pericoli & Massimo Sbracia, 2001. "Correlation Analysis of Financial Contagion: What One Should Know Before Running a Test," Working Papers 822, Economic Growth Center, Yale University.
  4. Taimur Baig & Ilan Goldfajn, 2000. "The Russian Default and the Contagion to Brazil," IMF Working Papers 00/160, International Monetary Fund.
  5. Corsetti, Giancarlo & Pericoli, Marcello & Sbracia, Massimo, 2002. "Some Contagion, Some Interdependence: More Pitfalls in Tests of Financial Contagion," CEPR Discussion Papers 3310, C.E.P.R. Discussion Papers.
  6. Guillermo A. Calvo & Enrique G. Mendoza, 1999. "Regional Contagion and the Globalization of Securities Markets," NBER Working Papers 7153, National Bureau of Economic Research, Inc.
  7. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
  8. Eichengreen, Barry & Rose, Andrew & Wyplosz, Charles, 1996. " Contagious Currency Crises: First Tests," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 463-84, December.
  9. Sweta Chaman Saxena & Valerie Cerra, 2000. "Contagion, Monsoons, and Domestic Turmoil in Indonesia - A Case Study in the Asian Currency Crisis," IMF Working Papers 00/60, International Monetary Fund.
  10. Michael D. Bordo & Antu P. Murshid, 2000. "Are Financial Crises Becoming Increasingly More Contagious? What is the Historical Evidence on Contagion?," NBER Working Papers 7900, National Bureau of Economic Research, Inc.
  11. Nancy P. Marion & Robert P. Flood, 1998. "Perspectives on the Recent Currency Crisis Literature," IMF Working Papers 98/130, International Monetary Fund.
  12. Dornbusch, Rudiger & Park, Yung Chul & Claessens, Stijn, 2000. "Contagion: Understanding How It Spreads," World Bank Research Observer, World Bank Group, vol. 15(2), pages 177-97, August.
  13. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
  14. King, Mervyn A & Wadhwani, Sushil, 1990. "Transmission of Volatility between Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 5-33.
  15. Giancarlo Corsetti & Marcello Pericoli & Massimo Sbracia, 2001. "Correlation Analysis of Financial Contagion: What One Should Know before Running a Test," Temi di discussione (Economic working papers) 408, Bank of Italy, Economic Research and International Relations Area.
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